Business

From the eye of the storm

by Executive Editors
written by Executive Editors

On September 30, Ayoub Humayed met with Executive for a political reality check on EDL, during which he answered questions on recent accusations leveled at EDL over corruption and criminal waste of public funds. In doing so, minister Humayed provided Executive with much anticipated answers on the issues of graft and transparency at EDL.

E: EDL has been specifically named in recent allegations of disappeared funds and inefficient management. Can you provide us with a precise figure on the cost of corruption at EDL?

AH: Lebanon is not an exception in the world. Corruption does not only affect developing economies. We should differentiate by looking at the causes of corruption. One cause of corruption is the lack of sustained and continuous supervision and accountability. Another factor is the lack of fair compensation that forces many EDL employees to supplement their salaries. Since I took office EDL and the water authorities have agreed to full transparency in any investigation. I am committed to facilitating the job of the investigative authorities in apprehending those who have abused the trust placed in them. The recent EDL crisis was purely financial. We needed money to buy fuel in the face of a global price hike. However, the debate became muddied by unhelpful side issues. [The minister then detailed how several measures were tried and abandoned until an agreement was reached under which $200 million could be borrowed from the central bank for the purchase of fuel.] In the course of these developments, the debate focused to the corruption and wastefulness that contaminated EDL in the past. Even though the director general of EDL and I have vowed to forward any information on irregularities we uncover, the ministry and EDL have no part in determining the direction of any investigation. Files on all previous activities at EDL have been made and are being investigated.

E: What about the stories that corruption was proven in these files?

AH: This issue does not concern us. A lot of noise has been made saying there is corruption, with people asking where the money went, and where wastefulness occurred. These questions have nothing to do with our present concern of finding money to buy fuel. These questions concern the past.

E: But the situation has become very heated and many people are stressing on the issue of corruption at EDL.

AH: Yes. Why we didn’t switch our power plants from oil to gas? Why are our networks and the tertiary links incomplete? Why can’t we erect power lines that would save millions? These are all legitimate questions, but some might have political reasons for raising these issues. Their motives may not be innocent. Today, these issues are in the hands of the judiciary whose responsibility it is to deal with any past irregularities. I am not in a position to pass judgment.

E: Could we talk about the underlying causes of the problems that are reflected in the situation of EDL. When did the problems start, and what was their effect on the plants, the networks, the grid, and power lines?

AH: We have a general problem in that there is too much ad hoc implementation of works with no proper planning. This is the main reason for irregularities in the public administration. This problem surfaces in every nook and cranny of our administration. You see a network of sewage pipes and no wastewater treatment plant and ask why do we need sewage pipes if we don’t have a treatment plant? I am not condemning nor am I excusing anyone. I am just not in the position to judge.

E: But we don’t want judgments.

AH: There are irregularities. I am not in a position to justify irregularities and mistakes. The issue of why there was an accumulation of factors that brought us to this explosive reality has aspects one cannot fathom with total objectivity and without bias or prejudice.

E: What is being done to remedy the problems at EDL?

AH: There are a lot of aspects to this topic. When EDL is suffering from the inner burnout of its administrative body and when one considers that there are 2,400 employees with an average age of 57 years, one can see that EDL cannot deliver what is required. For that reason, I said before that there are two sides to this issue. On the one side is the need to pump new blood into EDL through the activation of its human resources department. On the other side it is necessary to compensate employees fairly and give them incentives to work professionally.The reinforcement of human resources will mean that the administrative situation will improve, and so will the supervisory situation. It will also save money when compared to procedures currently used at EDL. It would bring great benefits if EDL can implement a system of bill collections, advanced meter readings and even prepaid cards. Completion of the 220 KV network and its connection to a six nation regional network should also provide energy at a lower cost.

E: Why weren’t these steps taken in 1994? What were the obstacles at the time?

AH: I cannot answer that. What I can say is that the funds that were received were destined for the reconstruction and rehabilitation of the power plants. These plants were destroyed more than once during the Israeli aggression, and the costs were prohibitive. If there had been no Israeli aggression, a lot of money would have been saved. Before the civil war and the Israeli aggression, EDL was profitable and productive. It is important to evaluate the entire set of circumstances in order to remedy the situation and not look back to the past and bring up corruption and waste. Our focus is the current operations at EDL, which are being handled in a scientific and practical manner to achieve a better future.

E: As many people feel no remorse over tapping into electricity lines or not paying their bills, how are you going to change the perception of EDL and produce an image of transparency?

AH: I already answered that in part. We always say that two matters go hand-in-hand. The first is the right of EDL to collect its dues, either from the citizen or from other administrative and public institutions. Secondly, EDL has to offer the citizen continuous electricity at reasonable rates. I gave directions and issued many statements to EDL staff that stressed an ethical interaction with customers. This very important at a time when the public sees EDL as corrupt and unable to provide a value for money.

E: If today there were no more theft at EDL, would the utility be working normally?

AH: When Italy’s power supply broke down the other day, the reason was traced to a power line between Italy and France that had become neglected. When electricity networks broke down in the US, it was also due to the age of the system. These are giant developed nations. It is easy to pass judgment in Lebanon but we have to be objective. We have to look at the circumstances that EDL is working under and consider the past.Due to severe space restraints in the magazine, Executive had to edit portions of minister Humayed’s sweeping answers. The Executive team made every effort to ascertain that no loss in content occurred as result of the editorial cuts and that the integrity of the answers was preserved to entirety.
 

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Business

Clean and clear

by Michael Karam
written by Michael Karam

Mohammed Samir, the Egyptian head of P&G (Proctor and Gamble) Levant is sitting in the conference room of P&G’s offices in the prestigious Atrium building in the BCD. Next to him, above to his right is a massive bag of Ariel. On his left is Monica Mogabgab, P&G’s communications officer. P&G has built up a whiter than white corporate image and, rather like its detergents, they want to keep it that way.

In fact, Samir is talking about soap powder. “The ingredients of household washing power varies globally from region to region, depending on local habits,” he explains. “In the Middle East there is less demand for an ingredient that removes red wine, but it may include other ingredients that help erase stains from the specific oils and fats we eat.” And the trivia doesn’t stop there. Feminine products – sanitary towels, tampons and the like – are also packaged to dovetail with local sensibilities, while, the fact that Arabs have different hair to Europeans is also reflected in the basic ingredients of locally-sold shampoos. Such is the world of fast moving consumer goods and it is one that P&G bestrides like a colossus.

For the benefit of those who have been living on Mars, P&G has been making baby, health, family and beauty products since 1838. It has a stable of 300 brands, which its sells to 5 billion consumers worldwide in more than 160 countries. It has global sales of $45 billion (three times Lebanon’s GDP) and manufactures 14 brands that generate revenues of over $1 billion each. P&G products – which nowadays include Ariel, Pantene, Herbal Essence, Always, Head & Shoulders, Crest, Pringles and Yes – have been on the Lebanese shelves since 1946, but it is only in the last two years that Beirut has been designated P&G’s regional headquarters for Levant, serving Lebanon, Syria, Jordan, Cyprus and Iraq. Locally, P&G claims a 10% market share of the $500 million consumer goods market and, as a result of its presence on the ground, has experienced what Samir calls “double digit” growth. “These figures justify our move from Switzerland,” he claims, adding that like all good multinationals, P&G has been robust in communicating it’s corporate message through the community by a series of health education programs.

In fact sustainable development has been the cornerstone of P&G’s international corporate image. P&G’s Pampers and the South African government are spearheading a campaign to fight maternal mortality in childbirth; Secret, a P&G deodorant for women, is lending its name to an initiative that helps American teen girls develop their self esteem, while Dash, the popular Italian detergent, has been supporting rural communities in Kenya for 15 years.

While all this may be very noble, the sharp end of the FMCG market is ruthlessly competitive. Samir, who says he “enjoys a good fight,” can proudly claim that P&G products are leaders in every category they compete in. “This is a fun market,” he enthuses. “We are up against all the big global brands, Unilever, Colgate Palmolive, L’Oreal and Henkel as well as the local brands, which are also pretty strong performers and cannot be discounted.” Although Lebanon is third in overall sales behind Iraq and Syria, its per capita spend is only bettered by Cyprus. “The Lebanese consumer is very demanding and incredibly price-conscious,” he explains.

Had P&G been able to respond to the arrival of the supermarket brands? “We pride ourselves on being able to respond to our consumer needs and we offer our customers a range of products for a range of budgets that are all underscored by our quality threshold,” says Samir, a P&G man since leaving university. P&G products vary in price (net of taxes) from country to country. Given the price sensitive nature of the local market, it would appear P&G’s competitive options are either to take a cut on margins to ensure a presence in every household, or be seen as a quality product ensuring strong brand equity. Samir outlines the pricing priorities, keeping his cards very much close to the corporate chest: “We must satisfy consumer needs in the best possible way,” he explains. “To do that we build a strong relation between the brand and the consumer to ensure that we are offering to the consumer the best value.”

One of the difficulties in having so many brands is that often the multinational is hidden. A consumer may be convinced by the P&G corporate ethos or a particular brand but may unknowingly buy detergent from P&G, toothpaste from Henkel and shampoo from Unilever. Can a multinational seriously command loyalty when it is hidden behind such strong brands? “We are a company of brands. We talk to our customer through those brands,” says Samir, employing a level of obfuscation normally found at a White House press briefing.

Regionally, Iraq represents P&G’s biggest market, but the situation on the ground means that P&G has not yet been able to fully exploit the post-war opportunities. “We have expansion plans for Iraq as well, which will rely heavily on the security and stability in Iraq in the coming few months,” Samir says. “As a Company, we strive to have leadership shares in the categories we compete in especially the core ones.”

Samir added that he hoped to achieve the same in Syria. “Our brands are already present [in Syria] and we look forward to launch more categories and brands there.”

Locally, he cannot envisage any time soon when P&G will appoint what it calls contract manufacturers for their goods. “We have done this in Syria and Egypt,” he says, “but it depends on two factors: the size of the market and/or the level of government incentive offered to us in order to take such a step. As we speak, neither of those criteria has been met.” As the conversation turns to environmental issues, Samir’s eyes light up. Ever the company man, he is quick to point out P&G’s gleaming record, even in developing countries. “We have our own rule book so even if the country in which we are operating has a poor environmental record or does not enforce international regulations, we will produce goods that have a benchmark.”

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The Buzz

The Feng Shui of life

by Kameel Mroueh
written by Kameel Mroueh

Unlike in the West, where it is all the rage, and the East, where it originated, in Lebanon Feng Shui (pronounced ‘fung shway’), is still clouded by skepticism and ignorance. In a country where buildings spring up without any coherent urban plan, it may be asking too much for people to consider repositioning their front door to face southeast in the belief that its new position will bring health, happpiness and prosperity.

However, there are pockets of devotees and it may just be that the the benefits of this ancient art, in which harmonious living is enhanced by balancing the elements within our living environment, will filter down into Lebanon’s often conservative mentality. Take the Aboulhosn family, who “Feng Shui’d” their apartment in Beirut and their houses in Hammana, and Virginia in the US. “We used a Lebanese Feng Shui professional,” said Ayla Aboulhosn. “She did two on-sight consultations for our two homes in Lebanon and looked at the plans for our house in the US.”

In Lebanon, it costs about $1.80 per m2 to Feng Shui a residential home (it’s about $2,000 for designing Feng Shui-friendly houses, depending on the size of the property). A Feng Shui master “measures” using a Luo’pan or Geomancer’s compass. The Luo’pan is used to determine the most favorable orientation of a building and the correct arrangement of its interior contents and architectural features. It has four principal directions associated with the Four Animals: The Dragon, Tiger, Phoenix and the Turtle. They symbolize the forces of nature and each has its own mythology and characteristics and its own element. For the Aboulhosns, the expert took the names and birthdates of everyone living in the apartment and, based on these dates, calculated the measurements of everything including the positions of the front door and door frames to the oven and the head board of the beds. All need to be assessed in order to generate the maximum “chi” or positive energy. The Aboulhosns did however have a “problem” with their swimming pool, which was situated behind the house. In the world of Feng Shui, this encourages robbery and causes financial loss for its inhabitants. It is no coincidence, then, that the house has been broken into nine times in the past six years. The draining of the pool does not create good chi and mirrors money disappearing, as does the flushing of the toilet, hence the reason many devotees feel that the toilet seat and bathroom door should be shut at all times. The practice of Feng Shui, which originated about 5,000 years ago in China, is founded on the belief that the arrangement of our exterior world exerts a powerful influence on our interior equilibrium and personal happiness. The balance of hidden forces in the landscape is maintained when certain laws of object placement and design are adhered to. This is where your expert, or Feng Shui master (Hsien-Sheng), comes in to harness beneficial Chi (Sheng Chi) and to deflect destructive Chi (Shar Chi) from a given location, and to also determine the level of Yin and Yang in that place. Good Feng Shui – the pooling of Sheng Chi – results in health, wealth, success and stability, whereas bad Feng Shui – the predominance of Shar Chi – will lead to illness, unhappiness, accidents and financial loss. It’s all in the Chi, so to speak, which flows along hidden veins or ‘dragon lines’ in the earth, and is both beneficial and harmful. Over the centuries, Feng Shui has evolved into a highly complex art. It is intrinsically linked to traditional Taoist philosophy – which looked upon the Tao, the way of the universe, as the architect of essential laws – yet enriched by folklore, mystical beliefs, metaphysics, mathematics and astrology. In Taiwan, Hong Kong and Singapore its influence has never deteriorated and it is an extremely important part of everyday life, infiltrating both private and business worlds. Ninety percent of buildings in Hong Kong were built according to Feng Shui principles, including the Hong Kong and Shanghai Bank. Feng Shui has seen a marked increase in popularity in the West over the past fifteen years. Marks & Spencer, Body Shop and Virgin Megastore are only some of a few establishments that construct all their stores according to the principle of the Wind and Water. Even Hillary Clinton saw to the repositioning of the White House’s furniture with the aid of a Feng Shui master to bring a little harmony and stability in the first family’s life. But even Feng Shui couldn’t solve all Hillary’s problems.

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The Buzz

Oriental bull market

by Isabelle De La Bruyere
written by Isabelle De La Bruyere

Prices for paintings of Middle Eastern subjects, especially those of the so-called Orientalist school, have soared since the 1973 oil boom, escalating from a mere $3,000 to $500,000 for top-quality works. Today, the record price for an Orientalist work is held by Christie’s for the Ludwig Deutsch’s1892 painting The Palace Guard, which they sold for a staggering $3,192,500 in 1999.

Wendy Goldsmith, former head of the 19th Century European Art Department at Christie’s and now an art advisor, noted: “The demand for Orientalist pictures is going from strength to strength but only, however, for a certain segment of the market. More and more new clients from both the Middle East and America are looking for top works by the major artists such as Jean-Léon Gérome, Ludwig Deutsch and John Frederick Lewis, and this is driving prices ever higher. They are very particular in their tastes, and don’t want to “settle” for more medium artists or works, unless they are extremely decorative.”

Indeed, Orientalist art is one of the few areas in which collectors can still find affordable museum-quality pieces, and with more and more of these top works going into private collections – leading to a decrease in supply – we will most likely see prices continue to rise in the coming years.The term Orientalism describes a penchant for the iconography connected with the Near and Middle East, and from the early decades of the 19th century and well into the 20th century, Orientalist art was created with a variety of motifs and collected passionately in the West. Widespread interest in the genre began soon after Napoleon’s abortive 1798 venture into Egypt and started to boom some 40 years later, courtesy of the expanding railway lines and the relaxation of the Ottoman Empire’s travel and trade restrictions.

Indeed, beginning around the end of the 18th century, European travellers set out to explore the East, and set their courses on the established pattern of what has come to be known as “the Grand Tour,” proceeding from the north or the west towards the south and southeast. The Grand Tour was often conducted out of a zeal for archaeology, and many artists, such as the Scottish David Roberts, placed a high value on topographical exactitude and worked from sketches made on the spot. Yet, as the genre became increasingly popular, other followers began to paint Orientalist pictures without ever leaving their studio, and simply used reference books and local models dressed in imported costumes and posed with imported props.

Typical subjects included the horse fair, the slave market, the mosque, the Holy Land landscape, and studies of caliphs, muezzins, Nubian slaves, and soldiers. One of the most favored subjects, however, was undoubtedly the harem, filled with its sensual odalisques and rich interiors. Such images were typically painted in the intensely detailed and realistic academic style, which ruled Europe for several centuries until Impressionism arrived on the scene.

By 1910, however, Orientalism had virtually disappeared from view in the West, not because of its subject matter, but because of its style. Throughout most of the 20th century, academic art was no longer attractive, giving way to a more modern style.

Isabelle de La Bruyère works in the Oriental department of Christies of London. She wrote this column for EXECUTIVE.

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Economics & Policy

New dawn of the internet age

by Thomas Schellen
written by Thomas Schellen

Since the dawn of the personal computer, Lebanon has been on the information technology map. Now as the age of the internet and new economy create business opportunities and bring international ICT companies to Beirut, the potential is there for Lebanon to establish itself as a Levantine hub. Executive checked how four Lebanese companies are gearing up for the challenge.

Computer Information Systems

Growth is steady for Computer Information Systems (CIS), which is shifting from distribution of hardware to providing implementation services and turnkey solutions for corporate clients. “Things are picking up again,” said sales manager Michel Nassif. “We are still recruiting people.”

According to figures the company published for its overall activities, normal is rather good. Together with sister company, Unidist, CIS realized consolidated IT sales revenue that increased from $100 million in 2001 to $125 million in 2002, with 55% coming from project integration and 45% from product distribution revenue from activities in some 30 countries in the Middle East, Africa, and Europe.

For 20 years, CIS and its affiliate companies have been the distributors for information technology firm Hewlett Packard and other manufacturers, first in Lebanon, and from 1993 in African and Middle Eastern countries. With 26% of its consolidated IT sales revenue in the Middle East, this region is the largest of seven geographic markets for the group, followed by North Africa. As the market for computers and peripherals has seen margins shrink, the firm’s growth orientation is now in project integration and turnkey solutions. “The integration business has sustainable margins compared to distribution, which is based on volume at low margins,” Nassif said.

A recent example was a contract won by CIS in collaboration with an international partner to install Lebanon’s new passport issuing system. From input stations to the production of computer-readable passports, the complete solution covered all hardware components and software for the highly secure system delivered to the Lebanese state. While the group set up three hardware distribution hubs in France, South Africa and Dubai, CIS based their know-how for project implementation in France and Lebanon. Focal competency realms are in platforms, networking and solutions based on the products of leading global software and hardware providers, from Oracle and Microsoft to Nortel and Cisco, with technicians and IT experts dispatched from Beirut to various projects in the group’s areas of operations. In the domestic market, CIS is looking for annual double-digit growth. “It is our base market – we have a strong presence here,” Nassif said. “We want to do business and remain preferred vendor of IT.”

The HP product lines dominate the field clearly in some office peripherals. For desktop and portable computers, Compaq and HP are part of the international manufacturer segment competing for individual, institutional and corporate buyers of brand products. Nassif assesses brand computers as holding about one third of the overall PC sales, which in his estimate total around 60,000 units per year.

Plans by the government to facilitate e-business and plans by the Ministry of Post and Telecommunications to implement a public data network would boost the IT industry, the manager said. “E-services and e-banking and e-commerce are what is going to come. It will take some time but it will happen.”

Software Design

Software Design has practiced the art of programming in Lebanon since 1986, and its core product, the Visual Dolphin suite of financial and office management software, is a leader in the local market. “In one sentence: Things are going great,” said company founder and CEO Michel Nseir. “We are in a real expansion phase. Visual Dolphin is doing beautifully well and we are competing quite easily with international products.”

According to Nseir, the advantages Visual Dolphin offers to local and regional clients are that it compiles the same features available from international products but is localized to the profile of companies in the Middle East, and at a total cost of ownership that is four times less than for the big names in office management solutions. The company has kept its development capacities centrally focused in Beirut, although it grew regionally over the past few years, opening offices in the UAE and Saudi Arabia. Out of its team of over 50 employees, one third are consultants and one third are working in administration and sales. The remaining 19 are developers and all but two are based in Beirut.

“In Lebanon, we feel modestly that we continue to be leaders. In the region, we are still too small – I would even say extremely small – but we have enough to keep our company busy,” Nseir said.

Only in the domestic arena, the company decided to maintain its strong position of direct contact and sales to customers. In addressing regional markets, Software Design is betting more and more on relationships with resellers and partners. Software Design recently partnered with new resellers in Kuwait and Jordan but its most significant directional moves point to Germany and Canada. In both countries, the firm has appointed consultants in search for business partners, and Nseir is particularly looking to outsource some of the company’s work to Canada. Outsourcing from Lebanon to Canada? The development cost wouldn’t be higher in Canada, Nseir claimed, because from day one of operations, the Canadian government would extend grants and financial benefits to the firm – such as footing 40% of salary costs – that one could only dream of in Lebanon. If a partnership with a Canadian firm and manufacturer of a compatible software product line can be reached, finding customers and opening the North American market are considerations that play a role in Software Design’s planning. But a further very important – and not entirely comforting – need behind the strategy is that for a new identifier. “A Lebanese brand name is not appreciated,” Nseir lamented. “Europe and Canada have a better perception among Middle Eastern customers than a Lebanese product.” For example, Indian decision makers in companies in the Gulf would be willing to consider non-Indian products but not Lebanese ones, and in pitching to those decision makers, Software Design would have to hide their Lebanese identity, the manager said. Apart from Great Plains, a US supplier of business solutions that is part of the Microsoft realm and the fiercest competitor for business management software in the Middle East, the market for these products is divided among a good number of regional and smaller international providers. With turnover in the range of $1.5 to $1.6 million and claiming about 12% year-on-year growth between June 2002 and June 2003, Software Design is a well-established member of the Lebanese software industry. But in the absence of real promotion of the national ICT industry and image, Nseir is incensed about the lack of prospects and support for his industry. “Why do I have to go to Canada today, just to change my Lebanese identity? Three years ago, we were proud to be a Lebanese company,” he said.

Microsoft

For multinationals that choose to appear on the Beirut market, development and education seems to be a more of a priority that racking up the sales figures. Microsoft has made such a commitment to the Lebanese market by opening a representative office here in 1999. The software giant sees the country as a “potential market,” said Microsoft Eastern Mediterranean general manager Charbel Fakhoury. “Lebanon has always been a leader in ideas. But it has been slow on executing a unified vision. This is how I see where we are today.” “If we look back over the past four years, things have changed,” Fakhoury said. “Early on, we had issues on software imports with customs. It caused costs, created delays and a lot of efficiency issues. This has been resolved.”

Less beneficial to the firm were the slowdown of growth in telecommunications, internet penetration and adoption of e-services. High costs of PC ownership and connectivity, along with leisurely progress of legislation on things ‘e’ and Intellectual Property Rights discouraged faster development and kept Microsoft’s revenue growth in Lebanon lagging behind other countries in the region. But the company has been working closely with important sectors, Fakhoury said. ICT industry and private sector businesses, governmental entities and education institutions from schools to universities have all been the partners Microsoft sought out successfully over the past years. Over the period, the company brought to Beirut a good number of road show conferences and events aiming to win both developers and business decision makers to view their respective enterprises the Microsoft way. But it also supported dot-net clubs for students at five universities and sponsored a “smart bus” to expand IT awareness in rural Lebanon. Organizationally, Microsoft has structured its Middle Eastern presence into five sub-regions, namely southern Gulf, northern Gulf, Saudi Arabia, Egypt, and Eastern Mediterranean. The Beirut office, where 36 employees are based, is entrusted with the Eastern Mediterranean region comprising Lebanon, Jordan, Cyprus, Malta, and – as far as the restrictions of US embargo and export control regulations allow – Syria. A win-win business message of local and international synergies is key in the concept professed by Microsoft. “Our role is being a catalyst of IT in the economy,” Fakhoury said. “We want to increase the number of our partners and their level of skills.”

Without maintaining a large global services structure, Microsoft banks on partners and professionals certified under its software engineering qualifications to work with its tools and enhance the value of the entire business proposition of using Microsoft products. In Lebanon, the firm was an “early comer, early investor, and early supporter of the market,” Fakhoury said. In acknowledging the need to see things moving in all segments here, he classified the country as a potential market. “The effort we have to put in to drive things in Lebanon is higher than the effort needed in other countries. The market requires a lot of convincing and is decentralized. At the same time it is very demanding.”

In October, Mircosoft will launch a new set of its market-

dominant programs the likes of Word, Excel, Outlook, PowerPoint et al, together with further programs, server platforms and services solutions under the new label Microsoft Office Systems. The main launch event for the Middle East will be at the Gitex IT show and trade fair in Dubai. But the company is also preparing something for Lebanon although details are not yet available.

Terranet

The world of chatting and information sharing would be naught without the net. Internet service provider Terranet came to the Lebanese market in 1999, with the handicap of being a late starter who wanted to deploy the best technology while complying with international industry standards. The company’s start-up goal was to rise to one of the top five or six ISPs in a local market characterized by rapid growth environment and exciting (by local standards) subscriber pool of well over 100,000.

“From being number 17, it took us one-and-a-half years to rise to one of the top three ISPs in Lebanon, gaining a very good reputation as the number one contender for customer satisfaction,” boasted Joseph Saade, Terranet’s deputy general manager. It was to the firm’s advantage that most customers had not been locked into loyalty contracts and were ready to experiment with new providers. But as Saade also said, the path to becoming really a major player in the Lebanese market was paved with hardship. Within a matter of a few weeks and months after large-scale introduction and marketing of its service as provider of an integrated internet access and portal, Terranet saw its cash flow model thrown in jeopardy when a ruinous local price war among Lebanese providers slashed profit margins for the whole industry to the point that ISPs sold access far below cost. Following this irrational phase of price aggression, a wave of non-licensed internet-over-cable operators took most of the new home user market with 24/7 services. Furthermore, the revenue theory of the portal concept, which aimed to bind customers to their provider by offering content and directory services and then cash in on that loyal customer base by selling (mostly banner) advertising space, flopped globally. “We made the same mistake in saying we want to provide the AOL of Lebanon and make enough money from ads to cover the cost of the portal,” Saade said, admitting that this never happened. Nonetheless, Terranet today claims that its some 22,000 true clients, who provide a steady stream of dial-up subscription revenue, represent about 40% of the country’s regular dial-up customers. The firm is a contender in both corporate and dial-up markets. About one third of subscribers use the faster – and more expensive – 56k service, which is the top of what an internet user can draw on in this country. Terranet undertook an investment into the much speedier ADSL (asynchronous digital subscriber line) service, which started to dominate developed communication markets about at the time when Lebanon’s public sector decision makers moved towards deliberating the pricing structure for the 56k ISDN service. Terranet’s two-year old ADSL equipment is ready to run but could not be introduced, due to another lack of pricing regulation.

Outside of Lebanon, Terranet succeeded in several Middle Eastern ISP projects either as subcontractor to set up a network or as full partner in a new service. While the company is bound to maintain its portal and design capabilities in the sister company, TerraVision, Saade said the corporate emphasis will be on providing access services. Overall, Saade is very optimistic. The haunting possibilities of further price wars have been resolved and the termination of the non-licensed cable-internet business through the government will bring a flood of new subscribers, he said. “The market now has four to five ISPs and the public is very intelligent in that concern, knowing what each company is capable of providing.”

Saade claimed that his corporate customers trust Terranet as an advanced provider of technology and reliable customer support even if the ISP is not out to offer bargain rates. He is also confident of securing a good market share of the expected boom in new dial-up subscriptions over the next two years.

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Business

The tortoise and the hare

by Michael Karam
written by Michael Karam

After a two-year hiatus, Admic, the $100 million retailer that brought us BHV and Monoprix, is making its next move. This month sees the opening of a third 2,250m2 Monoprix in Zouk, while in November, Monoprix number four, with 3,600m2, will open its doors for business in Hazmieh’s Baabda Plaza. But why the wait, especially with its main competitor Spinneys opening roughly 18,000m2 in Beirut, Tripoli and Sidon? A case of the tortoise and the hare, maybe?

“We have been conservative in our expansion strategy,” explains Michel Abchee sitting in his Jnah office. “We wanted to make sure it was underpinned with a solid financial plan.” With Lebanon’s supermarket sector shaping up like a chess game, it is easy to see the strategic reasons behind Admic’s latest moves. Firstly neither Monoprix nor Spinneys have ventured into the Zouk, Kaslik, Jounieh area, and although Spinneys’ flagship is located in nearby Dbayeh, retailers admit that Keserwan shoppers cannot be counted on to venture beyond the Nahr el Kelb tunnel. Secondly, Admic’s presence in Hazmieh will pre-empt a 15,000 m2 Spinneys in the same area, slated for Spring 2004. The big guns however, remain in reserve. This month also sees the beginning of a marketing campaign for Admic’s $70 million, 175,000m2 indoor shopping mall at Nahr el Mott near Dora, which is due to open at the end of 2004. Furthermore, Admic still intends to bring French department store Les Galeries Lafayette to Beirut, where it is hoped it will eventually anchor the long-awaited Souks project in the BCD. Potentially the jewel in the Admic crown, Les Galeries Lafayette should have opened, had the Souks shopping mall not stalled over the issuing of building permits. “It is a shame, but these things are out of our hands,” shrugs Abchee. With 60,000m2 of gross lettable area (GLA), the Nahr el Mott mall is the biggest retail project in Lebanon, outstripping the Souks, which is expected to have around 55,000m2 of net retail space and dwarfing ABC’s 30,000m2 Ashrafieh mall and the Metropolitan City Center, which has allocated 25,000m2 for shopping. Admic’s Nahr el Mott mall will house an 11,000m2 Geant Casino hypermarket and an 18,000m2 BHV department store as well as 90 other retail units.

“It will be a genuine regional mall,” says Abchee, who insists that the issue of location has been thoroughly studied. “Look at the map and tell me that all roads do not lead to Dora,” he says, pointing to an architect’s model of the project. “The immediate catchment area is still Beirut, as the mall’s sheer size should ensure that it generates traffic from outside the immediate and primary catchment zones.”

Theoretically, his choice of location makes sense. According to what figures are available from the Lebanese statistics bureau, Greater Beirut and its northern suburbs represent Lebanon’s biggest spenders with 45% of the nation’s residents earning 60% of its income. Still, Abchee is used to flying in the face of conventional wisdom. The original pitch for the Jnah complex was met with skepticism. “No one believed people would travel to Jnah to shop, but it has become one of the most accessible areas in Beirut.” At $70 million, the project has gone over budget by around 10%, but Abchee is philosophical. “It is unfortunate that we got caught by the strengthening Euro, the introduction of VAT and a load of other new laws that have levied us at every turn.”

Admic began revolutionizing Lebanese retail in December 1998, when it opened BHV, the home furnishing and appliance-driven department store in Jnah. The store was the first phase of the one-stop-shop formula envisioned by Abchee and his two brothers Pascal and Gaby. Monoprix opened upstairs in early 1999 and the rest is history. “We used to come here on holidays and notice that there was no organized shopping,” says Abchee. “We felt we could change all that.”

It was a bold assumption, but the “BHV effect” has changed the way the Lebanese shop and the three stores – a Monoprix branch opened in Ashrafieh at the end of 2000 – turn over $100 million annually.

“We wanted to create Lebanon’s first one-stop-shop and in doing so, we also tapped into latent or unconscious demand,” says Abchee. “People suddenly decided they liked to spend on DIY and this led them to look at shopping in terms of lifestyle.”
 

More significantly, however, is that the BHV/Monoprix alliance in Jnah has seen the area begin to develop into a thriving – albeit shambolic – retail hub. “One of the main problems is the lack of planning,” says Abchee. “Jnah is evolving. Tahan and Homeline are here and soon Spinneys will open, but the planning is non-existent. It will be a while before we meet the international norms but this is what is needed.”

Nonetheless, Abchee is determined to bring new standards to a market that he sees as brimming with potential. “There is a shortage in quality retail units,” he says. “We have to respect certain trends and standards of the international retail market if more global brands are going to open here. This is what Admic is trying to do with the Dora mall.”

He has a point. For years the consultants have been preaching larger developments, increased car-borne shopping, better designs, scientific tenant mix, longer and more uniform opening hours, accessibility and parking. Despite the numerous malls that have sprung up over the last decade, only the BHV/Monoprix stores, Dunes in Verdun, the Spinneys (and presumably the new ABC mall in Ashrafieh) outlets currently come close to meeting these criteria.

One area where international standards are being met is the $350 million supermarket sector, where Monoprix, along with Spinneys, are consistently setting new benchmarks in service, professionalism and, most importantly, pricing.

“We [Monoprix and Spinneys] have spearheaded a revolution that has seen the price of fresh food come down,” says Abchee. “The consumer price index has seen prices increase by up to 5% in recent years but food has not even hit 1%.”

Supermarkets make up around 35% of the food spend in Lebanon. However, in most major European countries and the US and Canada it is around 70%, so there is room for a bit more growth. Abchee concedes that Lebanon will probably not hit the 70% mark any time soon and compares it to Italy, which has not embraced supermarkets with quite the same enthusiasm as its northern neighbors. He also scoffs at those who claim that the little (and not so little guys like Bou Khalil) are being squeezed by the big two. “Yes, others have suffered,” he says. “But if you don’t invest or reinvest in your companies, then you will face difficulties.”

As the tortoise might say.

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Business

Bush’s flawed Middle East manifesto

by Claude Salhani
written by Claude Salhani

Last month, Condoleezza Rice, Bush’s national security advisor, compared the present post-Iraq war situation in the Middle East to post World War II Europe. “America,” wrote Rice in her August 7 editorial published in the Washington Post, “committed itself to the long-term transformation of Europe.” She goes on to say: “…our policymakers set out to work for a Europe where another war was unthinkable.”

Her views – and quite naturally one would assume those of her boss – on the administration’s guidelines upon which to build peace and democracy in the Middle East, contain the thesis of the Bush administration’s manifesto regarding the future of the Middle East. It will most likely not work.

Rice advocates working with those in the Middle East who “seek progress toward greater democracy, tolerance, prosperity and freedom,” and advocates copying the European experiment and applying it to the Middle East.

While indeed a noble concept, Bush’s plan for spoon-feeding democracy and prosperity to the Middle East remains, nevertheless, one with great many shortfalls. The Bush administration may well find many similarities in post-WWII Europe and today’s Levant, but in truth, it’s the dissimilarities that abound.

Undeniably, the United States played an important role in guaranteeing the stability, and particularly the security, of Western Europe all throughout the long years of the Cold War. But one must not ignore the fact that a stable Europe would have never been a possibility without, first and foremost, the strong desire of the Europeans themselves to place conflict behind them. After two devastating world wars and economic disasters that ravaged the continent, the Europeans finally realized it was time to look ahead.

“In an inherently unstable world, only the primacy of law and stable institutions can guarantee co-operation among nations and hence peace,” declared Jacques Delors, a former European Commissioner and finance minister in Francois Mitterrand’s first government in 1981, during a speech delivered in 1997 on the history of building a unified Europe.

Finding leaders who sought progress, democracy and freedom in Europe in 1945 was not difficult. Alas, that is hardly the case in most of the Middle East today. Granted, there are many people of goodwill across the region with a strong desire for peace and who wish to see true democracy implemented. But how many of those in a position of leadership in the Arab world would willingly allow free elections without fear of losing their grip on power?

“Muslim leaders are failing, first, to provide justice (adl) and, second, to create the conditions for the existence of compassion and balance (ihsan) or knowledge (ilm) in their societies,” wrote Akbar S. Ahmed, the Ibn Khaldun Chair of Islamic Studies at the American University in Washington, DC, in his book, Islam Under Siege. The US had hoped that the fall of Saddam would accentuate the drive for democracy. Instead, it appears to have crystallized anti-American feelings across the region. Jihadi Islamist fundamentalists are reported heading to Iraq for a chance to fight American soldiers. Two recent attacks against the Jordanian diplomatic mission and the UN headquarters in Baghdad, which killed representative Sergio Vieira de Mello and at least 20 others, reinforce the belief that the US is far from controlling the situation on the ground.

Following the capitulation of Nazi Germany in 1945, the old continent was ripe for a new start. Realization set in across Europe that war was not about to advance them, but rather regress socio-economic reforms. Western Europe came together in the face of a new threat – communism. “The memory of the failures of the inter-war years was still in the minds of everyone,” said Delors.

In Iraq, however, the enemy – extremist violence – comes from within. Additionally, the reconstruction of Germany was carried out mostly by local contractors, whereas in Iraq, the lucrative business deals are mostly being granted to US corporations.

Leaders such as Winston Churchill, who as early as September 1946 proposed establishing a United States of Europe, and West Germany’s Chancellor Konrad Adenauer emerged to rebuild the continent. But, perhaps, more importantly, visionaries such as Jean Monet and Robert Schuman – the instigators of a united Europe and the fathers of the modern-day European Community – were able to look into the future and envision a united Europe. “That is why the initiators of the community model, which gradually came into being with the treaties of Paris (1950) and Rome (1957) made a point of thinking creatively,” said Delors. “There was a new element at work this time around in that the idea was championed by statesmen. In other words, the ideal of transforming Europe had emerged out of the intellectual arena, as a political necessity of the utmost urgency,” said Delors.

That, regrettably, is far from being the case in the present-day Middle East, a region that until now has only spawned more iron-fisted despots or violent revolutions, than Adenauers or Schumans. Additionally, post-WWII Europe had managed to place aside its past differences, building together in unity. The ongoing Arab-Israeli dispute – seen by many as the nucleus of all continued unsettlement in the area – does not allow for a peaceful building process, yet. Neither does the education system in place in some Arab states, such as the Wahhabi-funded madrassas that fail to establish an educated elite needed to construct a brighter future for the region.

The first logical step, therefore, would be to address the leitmotif of Arab discontent and excuse for continued war footing that persists in some Arab states. It is important to point out that once the Arab-Israeli dispute is peacefully resolved, and the reason for maintaining a war stance dissipated, it will only be a matter of time before the urge for greater democratic reforms begins to be heard.

Which is what Bush hopes the “road map” will achieve by 2005. By then, the plan calls for a Palestinian and Jewish state living side-by-side in peace. It is also what they hoped jump-starting Iraqi democracy would accomplish. But don’t hold your breath. Road bumps such as the massive bus bomb that killed no less than 20 people in Jerusalem in mid-August and wounded another 100 are not about to make things easier for the peace process.

Rice talks about America’s long-term commitment to transform the region, but the Arabs are still far from convinced of two things that remain paramount before they can accept America as a full-fledged partner in the peace-building process. America and Western Europe – despite their differences – saw eye-to-eye on most major issues relating to the defense of the continent in the face of Soviet expansionism. Such is not the case in the Middle East, where the Arabs and the US greatly diverge on the Palestine/Israel issue.

Additionally, America must clearly demonstrate that it is indeed committed and here to stay (at least politically), as was the case in Europe. When the end of hostilities was announced on May 8th, 1945, aggression against US troops ceased. In contrast, in Iraq, over 140 US soldiers have lost their lives since Bush declared the end of major combat operations on May 1st. While no exact figures are available, some estimates place the number of Iraqis killed during the same period in the thousands. Many will argue that the situation for the average Iraqi today is much worse than it was before the war.

US troops were greeted throughout Europe as liberators. That is far from being the case in Iraq today, where anti-American sentiment appears to be on the increase and the security situation getting worse.Iraq, sitting on the world’s second-largest oil reserves, is only producing 750,000 barrels of oil per day, down from a pre-war mark that hovered around a million bpd. And that figure is down from 900,000 in June due to continued power cuts and acts of sabotage. As a result, Iraq is forced to import fuel for domestic consumption. Iraqis consume about 15 million liters (3.9 million gallons) of gasoline a day. The country can barely meet that need with domestic production. They use about 17 million liters of diesel, mostly for trucks. Currently, Iraqi refineries are producing only half that amount, according to U.S. military estimates. Ironically, oil is being imported from Kuwait and other countries to help cover the gap. Meanwhile, Iraqis blame the Americans for their ills. The hearts and minds of the Arab world the US had set out to conquer are being lost.

Yes, quite possibly, Bush, in his heart of hearts, is devoted to pursuing the “road map” to peace. Quite possibly, he believes that he can keep pushing the reluctant participants, prodding some here, coaxing others there, or even threatening some when needed. But, and here is the breaker, how committed would his successor be? Let’s assume the following scenario, just for the sake of argument. The situation in Iraq continues as it is for the next few years with a low-grade war of attrition being waged against US troops, who are forced to remain there. One American killed today, two more wounded tomorrow, another one or two killed the following day. Over two or three years, the casualties begin to add up and the electorate back home starts to get nervous. Not to mention the economic impact the continued occupation weighs on the American economy. (See Executive, August 2003)

Bush père found himself in a quite similar situation at the close of the first Gulf War in 1991. He had won a quick victory over Saddam Hussein, liberated Kuwait, freed the oil wells, defeated the Iraqi military and, for a short while, appeared to be a hero. But the domestic economic situation was suffering and that is what lost him the election to Bill Clinton. Bush junior could well find himself facing a similar conundrum.

Bush, meanwhile, remains committed. But if he looses the election in 2004 and his successor, possibly under electorate pressure, decides to bring the boys home and pull out of Iraq. Then what? American foreign policy has been known to suffer from severe attention deficit disorder in the past. Look at Lebanon; look at Somalia.

Secondly, the United States’ lack of objectivity in the Arab-Israeli conflict is another mark against it in trying to evenly mediate with both sides. There was no thorny issue comparable to the Palestinian-Israel one in post WWII Europe, and this made it easier for the US to be accepted as an equal partner in shaping the continent. Neither was there an issue of religion, which exists in the present context. Most of the Arab world continues to view the US war in Iraq as one of occupation and not as a war of liberation. Not to mention those who see it as a clash of civilization, as pointed out by Samuel Huntington.

This is where Europe (and the United Nations) can play a greater role in the peace building process. Europe is seen by Arabs as being friendlier to their cause, and naturally, they tend to trust Europeans more than they do the US. Rice, in her exposé, stresses the importance of including Europe and all free nations, “working in full partnership with those in the region who share our belief in the power of human freedom.”

But will the US accept to take a back seat now in the rebuilding of Iraq and allow Europe – including France and Germany, who opposed the war and were labeled “old Europe” by Donald Rumsfeld – to become engaged in Iraq? The answer to Bush’s manifesto for peace in the Middle East may lie in the answer to that question. Much as the US may dislike the idea, international participation may be the key to success.

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Society

Anatomy of an ad campaign: MEA

by Paul Belden
written by Paul Belden

The Client

No doubt about it – Middle East Airlines has had a rough time of it over the last 25 years. Two years ago, the trading value of the Lebanese national carrier was, in the succinct summation of chairman Mohammad El-Hout, (as quoted on the Skytrax news website): “Nil.”

Then came September 11 and things looked like they might suddenly get a whole lot worse.

How much worse? Hout’s stark assessment reflected the reality of an airline that found itself grossly overstaffed, paying too-high leases on its fleet of airplanes and in the beginning stages of trying to eliminate about a third of its 4,000-strong workforce.

In a tale that has been documented ad nauseam, in June 2001, the company had warned some 1,450 employees that it had to reduce staff as part of its cost-cutting initiative and that it would declare bankruptcy if they did not accept their dismissals and severance packages.

The cost-cutting led eventually to a series of threatened and actual strikes by pilots and other workers earlier this year – and any airline executive knows that a pilot’s strike can be the death knell for a struggling airline. (Just look at what happened to US-based United Airlines, or at what’s happening to struggling British Airways.)

The Opportunity

But out of the post-September 11 crisis arose tremendous opportunity for Middle East Airlines.

The business climate offered new opportunities. Regional travel in general and Lebanon’s tourist industry in particular, received a big boost. “Many Gulf travelers chose to remain in the Middle East rather than travel to Europe or the United States for their annual vacations,” said Ayla Dame, director of marketing for Middle East Airlines.

It also helped that Middle East Airlines had survived the workers’ actions, and had managed to cut costs. It had also completely re-engineered its flight schedule in 1998, and it began to seriously examine its options.

The lease on the airline’s fleet was coming up for renewal in 2003, and the management decided that this would be a good time to make a bold move. The airplane industry (also hard hit by September 11) was in a position to offer a good deal on selling rather than leasing planes, and MEA took them up on the offer. “We bought six single-aisle Airbus A-321s, and three wide-bodied A-330s,” Dame said.

Suddenly the airline that had been at the bottom of the business trough was riding the wave. So the MEA management team decided to try to see how they could capitalize on this through an original advertising campaign that would focus on this new sense of optimism.

“Mohammed El-Hout was given the mandate of bringing the company back into profitability, and now profitability has been achieved. So the next step is to create a new image,” said Joe Ayache, manager of Beirut-based advertising company BatesLevant, which was given the job of creating that image.

The Legacy

His first task was research. “We spent four or five months conducting research, and we found some extremely interesting things,” Ayache said.

The most interesting was the emotional bond that many Lebanese had with their national carrier. He immediately recognized that this was one of the key assets the company had going for it.

The bond was a reflection of the airline’s history. “Throughout the whole war, the MEA logo was sort of a national emblem,” said Ayache. “Whenever the fighting would ease up, the first that many people knew about it was when the airport opened and they could see a plane landing or taking off with that national logo on the tail.”

That’s partly why Middle East Airlines has always stuck with a strong cedar motif in its logo – to identify with the wellspring of affection that people who remember the war still retain for the airline. “The MEA logo was sort of made into a national link between the Lebanese people and themselves,” Ayache said. The latest logo, created by an Airbus in-house advertising agency when MEA leased planes from the jetmaker in 1996, is simplicity itself. It features a giant cedar tree on the tail of the airplanes, which is impossible to miss from almost any recognizable distance. In the past, the logo has varied, with many variations created by the Leo Burnett Agency, MEA’s main ad agency that still retains a substantial amount of MEA advertising work. One of the most durable of these images featured a cedar tree in the foreground, with a pair of jet airplane wings projecting from each side. Another memorable image featured a wavy white cedar tree outlined by clouds in a blue-sky background.

The Challenge

With the new planes, however, Dame has focused on implementing a new national advertising campaign that capitalizes on both nostalgia and optimism.
This last point is especially important. “You can’t advertise unless you have something to advertise,” she stressed. “That’s why in 1996, 1997 and 1998, when the company was struggling, we focused mainly on tactical advertising – that is, targeted ads listing routes, prices or specific campaigns.”

This was the time for something broader. “There were two challenges: the first had been taken care of, with the purchase of the new planes, and the setting of the new standards of service, punctuality, etc. That was essentially a business challenge – to provide something to advertise. The second challenge was to somehow leverage that newfound sense of optimism into a new identity in people’s minds.”

The Brief

And this is where Joe Ayache and BatesLevant came in. To get that new sense of identity, he brought in a team of designers working with Laudy Sleiman, Dame’s advertising manager, to create a new regional ad campaign.

“We wanted to build on the sense of identification that Lebanese people had with MEA. But we also didn’t want to focus on the past. Besides, we were also trying to reach many non-Lebanese potential customers. So this is a forward-looking campaign. When MEA bought its new fleet, these airplanes had zero miles on them. This fleet is completely new. That is a tremendous selling point,” said Dame.


MEA’s new fleet provides personal entertainment screens in all classes, with personalized video or audio options, wider seats, larger aisles and enhanced business-class comfort. It is the first Airbus model to provide digital video in all classes.

The Brand

The planes may be new, but the cedar on the tail is still the main brand identity for MEA, said Dame. “Are we trying to change that? No. But can we possibly evolve that to some degree? Yes.”

“Traditionally, you have a ‘master brand’ that underpins the essence of the message you’re trying to convey. Then, beneath that, come sub-messages that you might base a small campaign advertising on. For instance, one of these sub-messages could be the quality of your business class, another could be the services on your planes,” explained Ayache. With this campaign, Ayache is taking what is normally one of the smaller sub-messages – the newness of the fleet – and building it into the master brand.

“The idea was to find a concept uniquely Lebanese,” he said. “So we combined experience (the hands of the officer holding up the child), and youth (the young child).”

The Execution

The first wave of ads was rolled out in April of this year. There were two concepts: one featured a little girl being held up in the air by two male arms clothed with the gold-striped cuffs of a captain’s jacket. She is surrounded by blue sky and looking up into the air in front of her with her arms outstretched to each side, smiling hopefully, as if just catching first sight of an enchanted kingdom.

The other ad features a boy who is standing in the same pose, with the same smile on his face. In each ad, above the children runs the tagline “Youngest fleet in the world; most experienced airline.” Above the tagline is a row of jets with the trademark cedar logo on the tail.

The Buy

The ads were placed in quarter-page outlets in many newspapers in Lebanon and other Middle Eastern countries, as well as magazines and billboards.

The second wave of ads is due to come out in October.

“This is how you usually conduct a campaign like this one,” said Dame. “The first wave is to get people’s attention. The second wave is to reinforce and cement the image in the minds of the people.”

The ad campaign cost MEA $300,000, Ayache said, with about 70% of this money being spent on press ads, and the remaining 30% on outdoor advertising. There are no plans for any radio or television ads as yet, but Ayache “wouldn’t rule it out.”

The Difficulties

Perhaps the biggest difficulty of the ad campaign stems from one of the airline’s strengths, according to Ayache: people’s identification of MEA with the civil war can be a double-edged sword.

“In 1973, the entire MEA fleet was decimated on the ground at the airport by an air attack,” he said. “Of course the insurers paid up, but that is just one example of a bad memory that came out of the war. The Lebanese are very patriotic people, but to most of them the memory of the war isn’t all that great.”

Another difficulty is that a lot of young people don’t have any special affection or attraction to MEA. That affection really was something that was born of having lived through the war. According to Dame, 73% of MEA customers carry Lebanese nationality, and 50% live in Lebanon.

The Results

We won’t know the results until next year. With an ad campaign like this, said Dame, the goal is to make the new image stick in people’s minds. It’s to get them to the ticket counter based on an image and an identification. But then they have to want to come back.

Ayache agreed: ”The best campaign is worthless if the airline doesn’t deliver. Now MEA has to deliver.”

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Finance

Promising performances

by Tony Hchaime
written by Tony Hchaime

The rather tired theory that the banking sector is one of the sectors most likely to spur an economic upturn was given a boost by the promising performance of leading Lebanese banks over the past six months.

The major turning point for both the Lebanese economy in general and the banking sector in particular was the Paris II donor conference held in November 2002. While no direct material benefits seem to have trickled through to the economy, the overall confidence in the domestic currency, coupled with the image of stability portrayed by the government, have seen a redirection of funds towards Lebanon’s leading banks.

Among those banks, Banque Audi stood out with a considerable 20% increase in total deposits during the first six months of 2003, reaching $5.1 billion, and overtaking its rival Byblos Bank, which added almost 8% in deposits at $4.3 billion. BLOM Bank maintained its position as the country’s largest commercial bank, with its deposit base growing by more than 13% to reach $7 billion by June 2003.

Banque Audi also managed a staggering 50% growth in net income for the first half of 2003, relative to the same period of 2002. The bank’s net income jumped from $17.54 million in H1/2002 to more than $26.4 million in H1/2003. While net interest and commission income failed to register substantial growth, the main contributor to the impressive growth recorded during 2003 emerged as income from financial operations. In fact, net income from financial operations jumped a staggering 220% during the first six months of the year, reaching $19.6 million and contributing more than 74% of the bank’s net profits for the period.

BLOM Bank recorded a growth in net income of just over 5% year-on-year, reaching $42.8 million, while Byblos Bank’s net profits grew almost 10% from their June 2002 levels, leveling at $24.7 million. Bank of Beirut’s net profits inched up 1% over the same period, reaching $9.8 million.

Elsewhere, total deposits in Lebanese banks grew by almost 5% during the first half of the year, reaching LL57.6 trillion. As such, total deposits grew by more than 12% year-on-year, compared to a modest growth of just over 8% for the full year 2002. The accelerated growth observed during the first half of 2003 is a clear reflection of the increased confidence in the sector in general.

Moreover, overall confidence in the Lebanese pound has been reflected in the gains in LBP deposits as opposed to deposits in foreign currencies. As such, deposits in LBP have reached 37% of total deposits in June 2003, the highest level seen since February 2001. This compares to only 29% in June of last year.

Such developments speak greatly about the perceived outlook for the Lebanese pound locally, as the gains achieved in Lira deposits during the first half of the year have occurred despite the dropping interest rates on LBP-denominated deposits. Average interest rates on LBP deposits have dropped from more than 9.3% in January of 2003, to less than 8.3% as of June. On the other hand, interest rates on dollar deposits have been relatively stable, holding between 3.5% and 3.8% over the same period.

Despite the considerable growth in deposits, however, Lebanese banks have been somewhat wary of the domestic credit market. Total claims on the private sector have been fairly stagnant over the past year. Total lending to the private sector remained virtually unchanged between June 2002 and June 2003, settling around LL22.8 trillion. This compares to a growth of around 2.5% for the full year 2002. With regards to currency affinity, no major change has been noted on the credit market in Lebanon, despite the considerable difference in interest rates between loans in LBP and foreign currencies. As such, the vast majority of lending still takes place in foreign currencies, mainly in the form of dollars. Almost 83% of total claims on the private sector are in the form of foreign currencies, compared to 17% for the LBP.

In essence, the lack of growth in the credit market, coupled with the overwhelming dominance of foreign currencies in the debt market, illustrate the overall reluctance of major domestic bankers to lend. While such a position may be justifiable given the inability of the Lebanese economy to sustain economic growth and stability, an easing of self-imposed restrictions on the financing market in Lebanon would substantially contribute to growth in investments and consumption, thereby promoting overall economic growth.

On a more positive note, however, the Lebanese banking sector’s exposure to the public sector has dropped somewhat during the first half of 2003, after registering a sizeable expansion in 2002. In effect, claims on the public sector dropped from an all-time high of LL26.8 trillion in January 2003, to around LL24.5 trillion by the end of June. While the reduced exposure to the public sector has not yet played in favor of the private sector, it does provide banks with the reduced risk exposure and increased liquidity to promote corporate and consumer financing in the future.

However, while regional and domestic economic and political developments greatly influenced the performance of Lebanese banks over the past year, the banking sector itself did not fail to provide its own share of major developments, contributing to the overall growth momentum.

In a survey conducted and published by Euromoney magazine, four Lebanese banks appeared on the list of the Top 250 Commercial Banks in Emerging Markets. BLOM Bank placed the highest among Lebanese banks in 157th place, gaining 19 places since the previous year. Banque de la Méditerrannée placed 160th, followed by Banque Audi in 174th place, and Byblos Bank in 208th. While none of the Lebanese banks made it into the top 10, BLOM Bank and Banque Audi managed to improve their positions significantly and seem capable of maintaining such a positive trend given recent developments.

These encouraging developments, coupled with the progress made by Lebanese banks in Syria, where BLOM Bank and BEMO Bank (in collaboration with Bank Al Saudi Al Fransi) have obtained licenses to operate privately owned banks, are all positive signs that the sector is playing its role in the economic recovery process.
 

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Finance

The road to Cancun

by Joey Ghaleb
written by Joey Ghaleb

Lebanon will be present in Cancun, Mexico for the World Trade Organization (WTO) meetings in early September as an observer, putting aside the empty chair position adopted in Doha in 2001 and reflecting the country’s commitment to accede to the WTO. Following two negotiation rounds – the first was in October 2002 and the second is slated for fall 2003 – Lebanon hopes to achieve member status by 2005.

Without debating globalization, the WTO is an evolving mechanism that regulates international trade. With over 145 member countries, a small economy that relies heavily on trade – as is the case of Lebanon – cannot develop and move forward if it opts to stay out of the global economy. Lebanon was a member of the GATT (founding institution of the WTO) and would have been automatically a member of the WTO had it not withdrawn due to the participation of Israel. New WTO members are facing tough scrutiny, whereas early members easily joined, and some, including many Arab countries, are having hard time digesting their WTO obligations.

The WTO has succeeded to a large extent in liberalizing trade and setting rules for a number of sectors but it has not yet addressed sectors that have a larger impact on developing nations – notably, agriculture and services. Awaiting further developments on that front, the WTO is entertaining a multilateral agreement on investment (MAI) five years after the OECD failed to do so, a major endeavor that, again, serves the purposes of developed countries, the main players in the market of international investment.

The EU and the United States in August 2003, agreed on a joint proposal with regards to agriculture. Farm subsidies amount to $300 billion a year and 96% of farmers living in developing countries are worse off because of subsidies, let alone consumers who are paying higher prices. The proposal that caps some trade payments (as a percentage of agricultural production) at 5% is seen by countries, including Brazil and India, as a shy move on the road to liberalizing the sector. After the failure of the Seattle trade talks in 1999, jeopardizing the Doha Development Agenda (a round of negotiations that addresses development issues) would put free trade at risk. And, without an agreement on agriculture, developing countries will feel that new rounds will offer them nothing.

In Cancun, countries will be asked whether they want to launch negotiations on international investment at the multilateral level and what would be the scope of that agreement. As of yet, countries regulate investment, be it portfolio or foreign direct investment (FDI), through bilateral agreements. But in the absence of a bilateral treaty, cross border investment remains unprotected and access to markets difficult. A MAI could address pre-establishment (access of investment to a market) and post-establishment issues (protection of existing investment). FTML, the parent company of Cellis, may not have invested in Lebanon if there was no bilateral agreement between Lebanon and France to protect investment. Investors need to be assured that in the case of foul play, their rights will be protected.

In addition, the ministerial meeting will assess the recent developments in the negotiations on the liberalization of services that began in 2000 and will review the work of the working group on competition policy – both of which are of key importance and relevance to Lebanon and the region.
In light of these major issues set to determine the future of international trade and investment, the obvious question that arises is whether Arab countries have a position or a proposal to put on the table in Cancun. It may be difficult to ask for a common Arab agenda given existing differences, even though Arab ministers frequently hold meetings, the last of which took place July 24 in Beirut. But it may be time for the region to become pro-active. The WTO mechanism may not benefit the interest of a country if that country fails to have its voice heard. Developing countries are becoming increasingly active under the WTO umbrella, with more and more proposals submitted to the WTO secretariat, a strategy that eventually led to incorporating many development issues into the Doha Development Agenda.

As of today, 10 Arab countries are full members of the WTO. Among them, are the poorest, such as Djibouti and Mauritania, and five with observer status, including Lebanon. However, the Arab region remains outside the circle of developing countries that are now taking the initiative of turning the WTO into an institution that serves their objectives. In the process of becoming pro-active, governments of emerging economies are investing in building local capacity and expertise in order to make informed decisions that will bind their trade and investment policies under the WTO framework. Once the policies are locked in, excluding exceptional circumstances, countries will be bound to the rules they agreed to follow. This basic principle has come to haunt countries, which opted for the fast-track accession to the WTO and are now facing difficulty in delivering on their commitments.

The backseat approach adopted so far by Arab countries in the WTO is mirrored by their low intra-regional trade (around 8% to 9%), their high dependence on oil and lack of economic diversification, and their protectionist trade regimes reflected by high tariff and non-tariff barriers. A large number of bilateral trade treaties have been signed amongst Arab countries, however, most are general and few aim to fully liberalize trade. Negative lists, exceptions and exemptions overshadow the Greater Arab Free Trade Area (GAFTA), scheduled for 2005, which does not cover services like the movement of labor and other building blocks of a real economic bloc.

The silent voice of most Arab countries will not serve the purpose of deeper Arab integration into the global economy. The major challenge for the region is to get more engaged in the process by developing positions on the various issues raised in the Doha Development Agenda and not permitting developed and developing nations to hijack the process. If Macau and Malta can submit proposals and actively participate in the formulation of new WTO rules and agreements, maybe it is our turn to do the same.

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